Market struggles as hope in Cheserem fades

By Jackson Okoth and James Anyanzwa

On February 20, President Kibaki picked a former CBK Governor to chair the board of the beleaguered Capital Markets Authority (CMA).

While announcing the appointment Finance Minister Uhuru Kenyatta expressed overwhelming confidence in the former banking regulator saying he would be able to apply his wealth of experience in the banking industry to steer through much-needed reforms in the capital markets.

"During his tenure at CBK he played a key role in stabilising the banking sector through a very difficult period. I’m confident that he will play a similar role in the capital markets," the minister said.

The appointment of Mr Micah Cheserem to the helm of the CMA blew some fresh air into the market that was in dire need of confidence boost after three brokerage firms collapsed and investors fled the market citing irregularities in stock transactions and corporate governance issues.

Pale shadow

While accepting the offer and perhaps vaguely conscious of the tough tasks ahead, the former Governor took on unscrupulous stockbrokers, sternly warning them against dipping their hands in the cookie jar.

"We are giving notice to brokers and those people dealing with public money that we will be more swift to act and if you want to know ask the commercial banks what happened when I was a Governor," Cheserem said.

An accountant, Cheserem worked with firms such as Unilever and British American Tobacco before going to the central bank between 1993 and 2001. He is now into horticulture farming.

CMA Chairman Micah Cheserem and Ms Stella Kilonzo, CMA chief executive, at a press conference. [PHOTO: COURTESY]

Despite huge expectations over his recruitment, news of his appointment failed to stir the market, instead prompting a further drop in the NSE 20-Share Index by 1.5 per cent (40.35 points) to 2674.15 from the previous days 2714.5.

Surprisingly, in his first ever press conference, three months since assuming office, which was held last Friday at the authority’s head offices located at Reinsurance plaza, the bespectacled Cheserem was a pale shadow of himself.

During the rare press conference, Cheserem desperately tried to remain in the shadows and instead chose to let Ms Stella Kilonzo, the CMA chief, to run the show.

Interestingly, the board chairman kept on referring to his past experiences in the banking business, while answering questions from the floor, clearly avoiding issues raised concerning fraudulent activities at the Nairobi Stock Exchange (NSE). With procrastination on outstanding issues, ranging from investor compensation, fraud, governance and confidence building in the market, hopes for magic from Cheserem to sort out the mess as he did in the banking world, is slowly fading away, despite his earlier tough talk.

Powerful investors

Even with three months on the job Cheserem’s in tray remains full and even threatens to be unmanageable, as most of the outstanding issues affecting investors at the NSE remain unresolved. For instance, it is still unknown when the damning report of a forensic audit carried out on Nyaga stockbrokers by the PricewaterHouseCoopers (PwC) will be made public.

The shocking revelations of the report showed how powerful investment banks, stockbrokers and former custodians of the Capital Markets defrauded investors a massive Sh1.3 billion under CMA’s watch. Finance minister Uhuru Kenyatta said the CMA and NSE boards had already shown structural weaknesses in their operations and hence a need for their immediate overhaul and replacement with people with strong regulatory background.

With an outdated CMA Act and an investor compensation fund that cannot adequately pay for losses in a market capitalized at Sh 850 billion, the CMA still gropes in the dark for solutions on this issue of investor compensation.

hile the trading floor and the central depository are automated and networked, BackOffice operations of stockbrokerage firms remain offline.

This means that the entire trading system at the NSE is still vulnerable to fraudulent activities of unscrupulous IT managers and accountants operating within stockbrokerage firms.

The uneasy relationship that exists between Equity Bank, a powerful player in the stock market and the Central Depository and Settlement Corporation (CDSC) does not augur well for the market.

Horse has bolted

So far, CMA has responded to the Equity-CDSC row by taking this matter through its long and painstaking process of arbitration, with all signs that this matter could end up in court, like the rest have.

It is against this background that Cheserem finds himself in CMA today.

A far cry from his days at CBK where he had the luxury of a well-established administrative machinery and political support, to clean up the banking system, the game has changed.

An established greenhouse farmer in the Rift Valley, Cheserem sits on the board that is supposed to offer support to CMA management on how to restore investor confidence.

To push through his reform agenda, Cheserem will have to get past a clique of powerful investment bankers operating in a market that is littered with a network of fraudsters.

Interestingly, CMA recently closed the barn by setting up a fraud investigation unit; long after the horse had bolted.

It will be recalled that Cheserem used a similar but more ruthless and stealth anti-fraud fraud unit, on commercial banks during his clean up operations at CBK.

The unit comprises ten senior officers from the Criminal Investigation Department specialising in economic and cyber crime.

But while this public display of firepower is a deterrent as Ms Kilonzo readily says, the breeding grounds for fraudsters’ remains untouched.

Although the NSE runs on an Automated Trading System (ATS), which is hooked, to the Central Depository System (CDS), BackOffice systems at the stockbrokers remain offline.

This makes it convenient for collusion between an IT manager, dealer and an accountant at any stockbrokerage firm to engage in fraudulent deals, away from surveillance.

In other markets closer home, including Johannesburg Securities Exchange (JSE), there is a complete integration between the trading floor, central depository and activities in dealer’s rooms at the stockbrokerage firms.

Unlike commercial banks, which have some sort of Know Your Customer (KYC) guidelines to be followed when opening a bank account, all that one needs to have a central depository (CD) account is an identity card.

Surely, streamlining the process of opening a CD account, can be a quick win for CMA, without necessarily setting up another committee or waiting for a complete overhaul of the CMA act.

The CMA chairman could be losing valuable time after losing opportunities that have come his way.

For instance, the tussle between Citibank N.A Kenya Limited and stockbrokers over the issue of Safaricom Initial Public Offer (IPO) refunds remains unresolved to date.

burnt fingers

It is still unclear whether the reconciliations between Citibank and all affected stockbrokers will be completed and why CMA has yet to carry out a forensic audit on the entire Safaricom IPO refunds payment system.

Following the collapse of Nyaga Stockbrokers and Discount Securities, unanswered questions remain on why CMA took so long to move it, whether the NSE board at the time had some covering up to do for Nyaga, what assets have been recovered and who are to be prosecuted.

It will be expecting too much from investors, who burnt their fingers during the Safaricom IPO, lost their life savings in collapsed brokerage firms, if those who stole shares and wiped their bank accounts are free.

As the NSE remains depressed, the opportunity to get the market back to its feet may be slowing slipping away from the hands of CMA and Treasury.

One look at the face of one retired civil servant retiree, now living in Thika, who used all her benefits and personal life savings to buy shares of Barclays and Kenya Commercial Bank (KCB), all worth Sh 800,000 but lost all when Nyaga went down, is painful.

But to think that she will only get Sh 50,000 as compensation for all her life’s work, after waiting for endless months, is indeed heartbreaking.